SHLDQ - Sears Holdings Corp

[aws]

Well, this is escalating quickly.  Price action like bankruptcy is right around the corner, but it seems like they have a solid two years left to burn through even in the worst case of scenario.  I didn't see any news that might explain this latest leg down.  Yesterday WSJ reported that the cost of credit default swaps on Sears are hitting new highs.  They say it costs $4.6 million a year to insure $10 million of Sears debt, which sounds scary, but the rates have been close to that before and that would have proved to be a terrible bet in the past.  Realistically the market for Sears CDS is probably close to nonexistent anyway.

 

Not that the ability to delay an inevitable bankruptcy is appealing, I just thought the short trade was getting a little crowded and overpaying for short term downside exposure.  I thought it would be good time to make a contrarian bet and sell some puts.  Maybe it will work out, but I was definitely too early. 

[doughishere]

Eddie and Bruce must be loaning out their shares

[HalfMeasure]

Well, this is escalating quickly.  Price action like bankruptcy is right around the corner, but it seems like they have a solid two years left to burn through even in the worst case of scenario.  I didn't see any news that might explain this latest leg down.  Yesterday WSJ reported that the cost of credit default swaps on Sears are hitting new highs.  They say it costs $4.6 million a year to insure $10 million of Sears debt, which sounds scary, but the rates have been close to that before and that would have proved to be a terrible bet in the past.  Realistically the market for Sears CDS is probably close to nonexistent anyway.

 

Not that the ability to delay an inevitable bankruptcy is appealing, I just thought the short trade was getting a little crowded and overpaying for short term downside exposure.  I thought it would be good time to make a contrarian bet and sell some puts.  Maybe it will work out, but I was definitely too early.

 

Further, credit markets seem to disagree, at least from what I see in the bond pricing. Sure the YTMs are pricing a bit of risk, but they're not exactly distressed.

[HalfMeasure]

Eddie and Bruce must be loaning out their shares

 

Anyone know if they can actually do that? Any restrictions given their seats on the board?

[Marve2013]

The level of short interest hasn't changed much as per Nasdaq.  I think it's more 1) very little float 2) investor redemptions on Fairholme and RBS that are leading to the price declines. 

 

The thing with Sears is the price declines are really scary ... but part of it is because there is hardly any float.  A little selling goes a long way.

 

I see Sears more as a private company.  the wild swings in the price don't resemble that of a public company with good liquidity (and shock absorbers).

 

[CorpRaider]

Who knows.  No one knew EL was selling orchard park until he filed the disclosure like a week or two before the bk filing.

[T-bone1]

Who knows.  No one knew EL was selling orchard park until he filed the disclosure like a week or two before the bk filing.

 

Orchard Supply?

 

FWIW, Eddie, Bruce, and Tommy Tisch are on the board and all would have to file within three days if they sold a single share.

 

Someone more diligent than myself might be able to tell you how difficult/impossible it is for a board member to synthetically sell/hedge without disclosing, but I would think it is effectively impossible to do that legally with a weird stock like this without disclosure.

 

Judging by the cratering price of the bonds, there might be some fixed income guys shorting the stock to hedge - some of which might not need to get a borrow if they are exempt as market makers (I'm not up to speed on these regs).

 

The group that recently bought Craftsmen certainly saw the books and said on their call that they didn't believe SHLD was insolvent at the time of the sale (for fraudulent conveyance purposes). Between that and Berkowitz making recent purchases of SRG (which would almost certainly go down in price if SHLD filed), it's hard to imagine a filing is imminent.

 

I don't necessarily see an upside case in this stock anymore, but it seems like at least in the short term, the market is being more pessimistic than the facts (assuming the falling stock price is indicating a view that the company will file near-term, as opposed to just ultimately be worthless - which is certainly possible and the much more likely outcome of the two).

 

-Tbone1

[tylerdurden]

Who knows.  No one knew EL was selling orchard park until he filed the disclosure like a week or two before the bk filing.

 

Orchard Supply?

 

FWIW, Eddie, Bruce, and Tommy Tisch are on the board and all would have to file within three days if they sold a single share.

 

Someone more diligent than myself might be able to tell you how difficult/impossible it is for a board member to synthetically sell/hedge without disclosing, but I would think it is effectively impossible to do that legally with a weird stock like this without disclosure.

 

Judging by the cratering price of the bonds, there might be some fixed income guys shorting the stock to hedge - some of which might not need to get a borrow if they are exempt as market makers (I'm not up to speed on these regs).

 

The group that recently bought Craftsmen certainly saw the books and said on their call that they didn't believe SHLD was insolvent at the time of the sale (for fraudulent conveyance purposes). Between that and Berkowitz making recent purchases of SRG (which would almost certainly go down in price if SHLD filed), it's hard to imagine a filing is imminent.

 

I don't necessarily see an upside case in this stock anymore, but it seems like at least in the short term, the market is being more pessimistic than the facts (assuming the falling stock price is indicating a view that the company will file near-term, as opposed to just ultimately be worthless - which is certainly possible and the much more likely outcome of the two).

 

-Tbone1

 

+1

 

So the end of the Sears story is through seritage (SRG), right? They are going to float this zombie as long as they need in order to give sufficient time to SRG so Sears won't dump all the real estate to SRG suddenly. It seems SRG needs time to unlock value and it will be provided as much as time it needs. I can't believe Bruce Berkowitz is still defending his Sears investment in his latest annual letter and talking about transformation of sears blah blah. I guess they have to play this game until SRG can stand on its own. It means still openly lying though so I have no respect for these people any more...

 

 

[aws]

Investors reach $40 million settlement over Sears real estate deal

http://www.reuters.com/article/us-sears-lawsuit-settlement-idUSKBN15O2P7

 

Sears will get a payout from the board and/or their insurance company.  A $40mm payout is like 7% of their current market cap so I guess that's somewhat significant, but it didn't stop the stock from falling another 3% to new all time lows.  I hope this isn't something that they self-insure and the payment is just coming from their own insurance subsidiary.

[HalfMeasure]

Investors reach $40 million settlement over Sears real estate deal

http://www.reuters.com/article/us-sears-lawsuit-settlement-idUSKBN15O2P7

 

Sears will get a payout from the board and/or their insurance company.  A $40mm payout is like 7% of their current market cap so I guess that's somewhat significant, but it didn't stop the stock from falling another 3% to new all time lows.  I hope this isn't something that they self-insure and the payment is just coming from their own insurance subsidiary.

 

This seems really odd to me - anyone have additional color? Was it done to clear the air before the Mnuchin confirmation vote?

[aws]

Sears Holdings Outlines Next Phase Of Its Strategic Transformation

 

Preliminary fourth quarter 2016 operating results represent significant year-over-year improvement

 

Launches comprehensive restructuring to streamline operations, targeting at least $1.0 billion in annualized cost savings in 2017

 

Right-sizes asset-based credit facility, creating an incremental $140[1] million in liquidity

 

Plans to reduce outstanding debt and pension obligations by at least $1.5 billion, utilizing proceeds from recent transactions and operational improvements

 

http://www.prnewswire.com/news-releases/sears-holdings-outlines-next-phase-of-its-strategic-transformation-300405523.html

[HalfMeasure]

Sears Holdings Outlines Next Phase Of Its Strategic Transformation

 

Preliminary fourth quarter 2016 operating results represent significant year-over-year improvement

 

Launches comprehensive restructuring to streamline operations, targeting at least $1.0 billion in annualized cost savings in 2017

 

Right-sizes asset-based credit facility, creating an incremental $140[1] million in liquidity

 

Plans to reduce outstanding debt and pension obligations by at least $1.5 billion, utilizing proceeds from recent transactions and operational improvements

 

http://www.prnewswire.com/news-releases/sears-holdings-outlines-next-phase-of-its-strategic-transformation-300405523.html

 

+40% premarket feels like a big move but it's not even a round trip on the last 2 weeks price movement...

[Candyman1]

Sears Holdings Outlines Next Phase Of Its Strategic Transformation

 

Preliminary fourth quarter 2016 operating results represent significant year-over-year improvement

 

Launches comprehensive restructuring to streamline operations, targeting at least $1.0 billion in annualized cost savings in 2017

 

Right-sizes asset-based credit facility, creating an incremental $140[1] million in liquidity

 

Plans to reduce outstanding debt and pension obligations by at least $1.5 billion, utilizing proceeds from recent transactions and operational improvements

 

http://www.prnewswire.com/news-releases/sears-holdings-outlines-next-phase-of-its-strategic-transformation-300405523.html

 

Just read the release. Haven't laughed this hard in a long time. This is almost as funny to read as the other SHLD "transformation" presentations. Closing 150 stores will get you close to $1 billion in lower costs. I wouldn't call that cost savings. If SHLD had the balls they would say they would take down costs by X% per sq foot. I guarantee you that will never be published because they know they cannot achieve that. Smart to lay it out that way. Btw. all the integration and cost cutting talk is expensive to implement.

Also hard to see how the tangible results for Q4 comes in so well after SSS of -10% ... either SHLD is playing accounting games or SHLD is cutting costs without regard for the business. I just don't see where there are still many costs to cut. Its probably both. My thinking around the SSS decline is that the SSS is a straight direct decline in gross profit while there is little cost reduction compensation possible anymore. You can't turn off the lights, you can't have even less employees that there are already at the stores, the corporate offices are already understaffed and inexperienced, etc.

Now the increase in interest rates can have been a help with the pension liabilities. Otherwise I see no positive for the business. Now we have to see what SSS will be in Q1 2017 ... After the 2015 -9.2% SSS number I thought 2016 was going to less bad, still it came in at minus 10%. If SSS decline does not turn around, it is over for SHLD. If people stop buying things at your stores there is no reason to exist. If SHLD has to use $1.8 billion in cash for 2017 I just do not see how the assets cover the negative equity going forward.

 

[muscleman]

Next Phase of Our Transformation?  :o

I thought their three year transformation had completed in 2016 and they would have already had good profits.  ;D

 

Since that obviously didn't work and the losses were "voluntary", let's start the next phase of transformation now!  8)

 

[Candyman1]

Why doesn't Eddie quit SHLD. Lately I have been thinking about this. It is clear that Eddie L is obsessed with making SHLD work. He has allowed it to hurt ESL in a big way. It kind of reminds me of my marriage. Being Catholic, for me divorce was just not in my vocabulary, until my ex decided the issue for me. And while she took me to the cleaners, as the years progress I find myself being more thankful to her for doing it. I got to rebuild and do better without having to deal with a bad marriage. I have seen so many hedge fund guys blow up and reboot. Eddie L. could do the same I am sure he could come up with a story. If he just pulled the plug publicly and acted rationally in closing it down now, he could explain it away and over the years rebuild ESL. If he stays around and goes down with the ship passively, it will be seen as a much bigger failure. Just a thought.

[peridotcapital]

Why doesn't Eddie quit SHLD. Lately I have been thinking about this. It is clear that Eddie L is obsessed with making SHLD work. He has allowed it to hurt ESL in a big way. It kind of reminds me of my marriage. Being Catholic, for me divorce was just not in my vocabulary, until my ex decided the issue for me. And while she took me to the cleaners, as the years progress I find myself being more thankful to her for doing it. I got to rebuild and do better without having to deal with a bad marriage. I have seen so many hedge fund guys blow up and reboot. Eddie L. could do the same I am sure he could come up with a story. If he just pulled the plug publicly and acted rationally in closing it down now, he could explain it away and over the years rebuild ESL. If he stays around and goes down with the ship passively, it will be seen as a much bigger failure. Just a thought.

 

He has said that he wants to be known as a good businessman. I think he has proven his hedge fund manager skills and tackled Sears as Act 2. The real estate and brands were his margin of safety. I think it is obvious to anyone who has paid attention that he is not a good businessman (well, at least not a good retail executive), but I don't think the last 12-13 years are going to result in him waking up one day and saying "well, I tried and it didn't work so I think I'll go back to devoting 100% of my time and energy to trying to post 20% CAGRs for my limited partners." He's been there and done that.

 

Today's press release once again shows us that he is doing exactly what he has said all along he was going to do (every shareholder letter and annual meeting presentation has been consistent with his actions). 2017 is going to be more of the same.

 

Why? Well, let's say that 10 years from now Eddie has parlayed the Kmart/Sears disaster into 1) a large stake in Seritage that is worth 2-3x the current stock price and 2) a large stake in the still-public SHLD which has slimmed down to a few hundred small stores and adjacent services that bring in $5 billion in annual revenue and $250M of EBITDA. Somehow he will have kept SHLD out of bankruptcy and will be left with majority stakes in two public companies that could have a combined equity value of $10 billion. They will be profitable so he could then try out all of his new, crazy business ideas to try and grow.

 

Now we might not consider that a success because we remember when SHLD was trading at $150 and was worth $15 billion, but would he consider that a success? I think he would. I can hear him now at the 2027 annual meeting... "most other retailing executives would have plowed billions of capex back into the Kmart and Sears stores to try and compete with WMT and TGT. That strategy would have failed and surely SHLD would be bankrupt. Instead we transformed the company into a sustainable enterprise for the next 100 years."

 

Is there anything he has said or done since 2004 that would go against this type of framework as an answer for "why?" I don't think so, and today's press release reinforces that yet again.

 

PS: Here's hoping that the $1.5 billion of pension/debt reduction in 2017 includes the October SRAC debt and maybe a refinance of the remaining 2018 HoldCo notes! :)

[CorpRaider]

If Macy's and Walmart can't/can barely make it, history will seemingly have to cut the guy running k-mart and sears some slack.

[Candyman1]

Why doesn't Eddie quit SHLD. Lately I have been thinking about this. It is clear that Eddie L is obsessed with making SHLD work. He has allowed it to hurt ESL in a big way. It kind of reminds me of my marriage. Being Catholic, for me divorce was just not in my vocabulary, until my ex decided the issue for me. And while she took me to the cleaners, as the years progress I find myself being more thankful to her for doing it. I got to rebuild and do better without having to deal with a bad marriage. I have seen so many hedge fund guys blow up and reboot. Eddie L. could do the same I am sure he could come up with a story. If he just pulled the plug publicly and acted rationally in closing it down now, he could explain it away and over the years rebuild ESL. If he stays around and goes down with the ship passively, it will be seen as a much bigger failure. Just a thought.

 

He has said that he wants to be known as a good businessman. I think he has proven his hedge fund manager skills and tackled Sears as Act 2. The real estate and brands were his margin of safety. I think it is obvious to anyone who has paid attention that he is not a good businessman (well, at least not a good retail executive), but I don't think the last 12-13 years are going to result in him waking up one day and saying "well, I tried and it didn't work so I think I'll go back to devoting 100% of my time and energy to trying to post 20% CAGRs for my limited partners." He's been there and done that.

 

Today's press release once again shows us that he is doing exactly what he has said all along he was going to do (every shareholder letter and annual meeting presentation has been consistent with his actions). 2017 is going to be more of the same.

 

Why? Well, let's say that 10 years from now Eddie has parlayed the Kmart/Sears disaster into 1) a large stake in Seritage that is worth 2-3x the current stock price and 2) a large stake in the still-public SHLD which has slimmed down to a few hundred small stores and adjacent services that bring in $5 billion in annual revenue and $250M of EBITDA. Somehow he will have kept SHLD out of bankruptcy and will be left with majority stakes in two public companies that could have a combined equity value of $10 billion. They will be profitable so he could then try out all of his new, crazy business ideas to try and grow.

 

Now we might not consider that a success because we remember when SHLD was trading at $150 and was worth $15 billion, but would he consider that a success? I think he would. I can hear him now at the 2027 annual meeting... "most other retailing executives would have plowed billions of capex back into the Kmart and Sears stores to try and compete with WMT and TGT. That strategy would have failed and surely SHLD would be bankrupt. Instead we transformed the company into a sustainable enterprise for the next 100 years."

 

Is there anything he has said or done since 2004 that would go against this type of framework as an answer for "why?" I don't think so, and today's press release reinforces that yet again.

 

PS: Here's hoping that the $1.5 billion of pension/debt reduction in 2017 includes the October SRAC debt and maybe a refinance of the remaining 2018 HoldCo notes! :)

 

I forgot about this quote by Eddie "we transformed the company into a sustainable enterprise for the next 100 years." I laughed hard when I read the "transformation" release this morning and this made me laugh even harder.

[BeerBBQ]

From my talks with people that develop for some of the JV partners, they doubt this whole "value in below market leases" thesis.

 

What specifically makes them doubt the value in below market leases?

[scorpioncapital]

I suppose below market value leases are only valuable if :

-owned / acquired at below market prices, or

-tenant is arms-length party able to pay the increase in rent which is surely contemplated by the below market lease owning landlord.

 

 

[Candyman1]

From my talks with people that develop for some of the JV partners, they doubt this whole "value in below market leases" thesis.

 

What specifically makes them doubt the value in below market leases?

 

Remember when Ackman was involved in the Borders bk situation. Borders had all these below market leases that were according to Ackman very valuable. Borders was a bust for Ackman.

 

A. Every lease says that you need to get the approval of the landlord for subletting. What is the incentive of a landlord to say "sure SHLD, you are paying me way below market and go ahead, sublet and charge market rent while you continue to pay me below market rent."

 

B. Malls have "reciprocal usage agreements". Meaning you don't just have to ask for permission of the landlord, but also ask for permission from the stores in the mall before you can move forward.

 

C. In the same way that if SRG wants to get increased rents it needs to invest between 150 to 225 a square foot in order to get increased rents, SHLD will also need to invest a lot of money in order to prepare the "below market rent" location for a new tenant if it wants to get significantly higher rents. Now if you are the owner of a property, the NPV looks more attactive than when you have only temporary usage rights. Also it is harder to get financing to pay for the work.

 

One could make an argument that below market leases have value to landlord. In short, the landlord could be willing to buy out a lease. Now given SHLD's situation most landlords will not be as inclined to pay money to buyout SHLD if SHLD might give the store back to them not to long from now. Why do you think the JV's aren't recapturing properties from SHLD. They too are waiting for a filing.

 

 

 

[SlowAppreciation]

From my talks with people that develop for some of the JV partners, they doubt this whole "value in below market leases" thesis.

 

What specifically makes them doubt the value in below market leases?

 

 

A. Every lease says that you need to get the approval of the landlord for subletting. What is the incentive of a landlord to say "sure SHLD, you are paying me way below market and go ahead, sublet and charge market rent while you continue to pay me below market rent."

 

 

But Seritage is the landlord.

[FCharlie]

If Macy's and Walmart can't/can barely make it, history will seemingly have to cut the guy running k-mart and sears some slack.

 

Macy's has generated $7.2 billion in operating cash flow in the last three years.

 

WalMart has generated almost $80 billion of operating cash flow in the past three years.

 

If you ignore the price action in the stocks, these companies don't look sick at all.

[Ulrich]

i don t understand why many people see wal-mart as sick. I understand that wal-mart is the biggest US retailer. The problem is more that Wal-mart has not the growth opportunities in the USA anymore , because it s already in nearly every attractive market.

 

So is the revenue growth not much bound to the inflation rate? Is it not naive to think a retailer as big as wal-mart can grow in the US much more than inflation? Inflation in the western world is weak the last years and so it sounds not unhealthy for the biggest retailers to have moderate revenue growth.

 

But now back to Sears....

[CorpRaider]

My point, if any, was both CEOs/management teams have struggled and been shown the door during the period of EL's struggles and they surely had much, much stronger hands.